Today is Kellogg’s commencement ceremony. Hundreds of students will shortly walk across the stage and receive their degrees. I’m here at Ryan Field in Evanston getting ready to march in with the faculty.
The graduates will then celebrate. And in the coming weeks they will begin their careers as business leaders.
During today’s ceremony, I suspect the speakers will offer suggestions on leadership, ethics and happiness.
I’ll provide some advice on money. I teach marketing, not finance, but after working for eleven years in the corporate world and twelve years in the academic world, I’ve learned a few things about managing funds.
This is my most important piece of advice. You should set aside some money. Having funds in the bank gives you peace of mind; if things go poorly at work you will still be ok. It also gives you freedom; you can pursue interesting career opportunities if you don’t need a big income.
When I left Kraft to teach at Kellogg, my income went down by about 80%. I walked away from a good salary, a bonus and stock options. I was fine with the risk because I knew that I would survive even if it didn’t work out. I had enough saved up that I could cover the mortgage for quite a long time.
It is impossible to predict short-term moves in the financial markets. Anyone who claims they can do that isn’t telling the truth.
Over time, however, assets tend to increase in value. So buy stock in good companies and then hold on. Some of the stocks will go up in value. Others will drop like a stone. On average, however, the portfolio will do well.
The buy and hold approach has two other important benefits. First, there are no capital gains taxes. If you never sell a stock, you will never realize a gain. If you sell a few losers you will generate losses. Instead of paying a tax you will offset a small part of your income.
Second, there are no expenses. If you buy a stock and hold it you won’t ever pay a fee. You don’t have low expenses. You have no expenses.
As an individual, you are completely outmatched by investment professionals. Financial firms have access to incredible technology and investment techniques. On any particular trade you can safely assume you are losing out to someone.
Individuals have one advantage over investment managers, however: time. Financial wizards have to consistently generate income. If they have a bad year, they are at risk of losing significant assets under management.
We can be patient. I don’t really care if the value of any particular stock goes up or down next year. I hope that over the next twenty years the price will go up, and it should. I’m not concerned about short-term moves.
This gives the individual investor a big advantage. We can let the power of compounding kick in and patiently wait for things to turn up.
My grandfather used to keep all his stock certificates at the bank in a safe deposit box. On occasion he would stop by to look at the holdings. He couldn’t easily trade the stocks and he didn’t. Today it is easy to trade, but that doesn’t mean we should.
Giving away money is a wonderful thing. You help the causes you care about (like Kellogg!). You also feel good; research studies show that donating money has a remarkable impact on our happiness. We feel good about ourselves when we do it. So be generous and help people.
In the next few weeks, the new graduates will start receiving an income. This will be a good moment. It is also a fine time to save, buy and hold, be patient and be generous.